CIC Ethics & Professional Standards 3 — Questions and Answers
Question 1: A CIC manages both individual and institutional accounts. When a large block trade is executed, how should the shares be allocated?
- Institutional accounts should receive priority due to their larger size
- Individual clients should always receive shares before institutional clients
- Shares should be allocated fairly and consistently using a pre-established policy (Correct answer)
- The most profitable accounts should be allocated shares first
Correct answer: Shares should be allocated fairly and consistently using a pre-established policy
A fair and consistent pre-established allocation policy ensures equitable treatment of all clients regardless of account size or profitability.
Question 2: Which scenario best represents a violation of the standard of care under CIC ethics?
- Recommending a diversified bond fund to a conservative retiree
- Placing an aggressive growth fund in an 80-year-old's sole income account without analysis (Correct answer)
- Suggesting index funds to a client who prefers low-cost investments
- Rebalancing a portfolio based on a written Investment Policy Statement
Correct answer: Placing an aggressive growth fund in an 80-year-old's sole income account without analysis
Recommending high-risk investments unsuitable for a client's age and income needs without analysis violates the suitability and standard of care requirements.
Question 3: A CIC discovers that a colleague has been front-running client orders for personal profit. The CIC's ethical obligation is to:
- Report the misconduct to compliance or appropriate supervisory authority (Correct answer)
- Warn the colleague privately to stop the behavior
- Do nothing unless the CIC is directly impacted
- Document the issue but wait until year-end review to report
Correct answer: Report the misconduct to compliance or appropriate supervisory authority
Ethical standards require immediate reporting of known misconduct to compliance or a supervisory authority to protect client interests.
Question 4: Under CIC professional standards, performance presentations must be:
- Based solely on the best-performing accounts to attract clients
- Fair, accurate, and not selectively omit periods of poor performance (Correct answer)
- Gross of fees to reflect the investment manager's true skill
- Expressed only as annualized returns for ease of comparison
Correct answer: Fair, accurate, and not selectively omit periods of poor performance
Performance presentations must be fair and complete, including all relevant time periods, to prevent misleading prospective clients.
Question 5: A client instructs a CIC to vote their proxies in a way that benefits a political cause rather than maximizing share value. The CIC should:
- Follow the client's instructions since the client owns the shares (Correct answer)
- Refuse and vote to maximize financial value regardless of client wishes
- Vote with management's recommendation as a neutral default
- Abstain from voting to avoid the conflict
Correct answer: Follow the client's instructions since the client owns the shares
Proxy voting authority belongs to the client, and the CIC must follow explicit client instructions on how to vote their securities.
Question 6: Which of the following best describes the concept of 'reasonable care' in the context of CIC investment advice?
- Guaranteeing positive investment returns for all clients
- Applying the diligence and judgment that a competent professional would exercise (Correct answer)
- Following every client instruction without independent analysis
- Limiting advice to only government-backed securities
Correct answer: Applying the diligence and judgment that a competent professional would exercise
Reasonable care means applying the diligence, skill, and judgment expected of a competent investment professional in similar circumstances.
Question 7: A CIC learns that a third-party research firm they rely on has undisclosed compensation arrangements with companies it rates positively. The CIC should:
- Continue using the research since it was produced by a reputable firm
- Disclose the potential conflict to clients when using that firm's research (Correct answer)
- Immediately stop using the firm's research and find an alternative
- Report the firm to regulators but continue using the research
Correct answer: Disclose the potential conflict to clients when using that firm's research
When research sources have undisclosed compensation arrangements, clients must be informed of the potential conflict before the CIC relies on that research in recommendations.
CIC Ethics & Professional Standards 3
A CIC manages both individual and institutional accounts.
When a large block trade is executed, how should the shares be allocated?